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Spousal IRAs

Retirement savings for the stay-at-home spouse

by Nancy E. Frank

As a homemaker, you may not be eligible for the kinds of employee benefits your spouse's company offers; however, the lack of a paycheck does not preclude you from saving money separately for your own retirement.

To be a secure granny, be a smart mama--
start saving now!

Tax law changes in 1997 began to recognize the value of a spouse who isn't in the official "work force." Thus, the annual limit on contributions to what's known as a "spousal IRA" (Individual Retirement Account) has been raised from $250 to $2,000. This means that as long as your family's income exceeds $4,000, you may personally open an IRA, whether or not you officially had "earned income."

Why IRAs are a good idea

Why invest in an IRA, given that you can't touch the money without penalty until you are 59 1/2? The short answer is: Tax-deferred or tax-free compound interest.

If you plan to retire at 60 and you can invest $2,000 a year beginning at age 30, and you continue so for the next 30 years, at 8% interest (considered a moderate-risk investment strategy), then you will have $226,566 saved for retirement. If you start at 30 and invest for 20 years, then leave the money to compound another 10 years, you'll have $197,593. If you wait until you're 40 to start, and plan to contribute until you reach 60, that $2,000 a year will only grow to $91,524.

And if you're female, remember that women statistically live at least seven years longer than men--the average for women of all races is 77.8, and Social Security is playing an increasingly smaller role as a retirement income source.

Take your pick

With IRAs, you have two choices on the tax front: Pay now or pay later. The traditional IRA was strictly "pay later." There, you reap the tax benefits up front; you subtract the $2000 from your family's adjusted gross income on your federal tax form, so you avoid taxes now, but you will pay taxes on the money that accumulates in your account when you are ready to withdraw from it.

Even investing your coupon-saving money can build your IRA up faster than you might think!

With a Roth IRA, you don't get to subtract the contribution from your taxes now, but then the money grows tax-free, and you don't have to pay taxes on what you take out later. Age 59 1/2 is the youngest eligibility age, with age 70 1/2 a requirement for withdrawals from a traditional IRA.

You also don't have to come up with $2,000 all at once. It breaks down to approximately $150 a month, or $38 a week. One mother I know takes the weekly total of what she's saved by using store coupons, and deposits that sum in her savings account. Another swore off video stores in favor of borrowing videos from her local library, and uses the money saved in rental fees toward her IRA. Drink one fewer cappuccino a week, and there's three dollars. Seven dollars here, four dollars there--that $38 a week toward your future will add up quickly.

Start by stashing this money in a savings account. Then, as it grows, look for more sophisticated--yet still understandable--options. Most people opt for different mutual funds, and many funds accept IRA accounts starting with as little as $50 a month, but don't invest until you've researched your choices. Moreover, keep in mind that all the fine print that says "Past performance is no indication of future results" means exactly that.

Do what you can

What you invest in ultimately depends on your own risk tolerance level, but to begin with, you need to start saving on whatever level is possible for you. And if you are choosing between saving money for your child's education vs. saving for your own retirement, college financial aid offices generally do not take retirement account money into their calculations of how much a family can afford to pay, whereas money that isn't tax sheltered is definitely a factor.

Financially, regardless of your marital status, you need to look out for yourself. The facts on women, aging, family status and retirement are sobering: The divorce rate is nearly 50%; women in general live seven years longer than men; the average age of widowhood is 55; 80% to 90% of women will be responsible for their own finances at some point; six out of 10 Americans living alone are women, many of whom are widows who were not poor before the deaths of their husbands.

Women have traditionally had less access to money and information and knowledge about finance, but that has been changing. And the Spousal IRA is beginning to level the retirement savings playing field, with the legislation behind it about as family-friendly as Congress has managed to achieve yet.